Why we pay with money

Published on in category Finance
Why we pay with money

Money has magical powers in our society. Every day we sacrifice a large part of the day and effort at work to earn them, for some of us their mere possession earns a living and for others the money can disrupt whole families. But we weren't using money in the past. What was the main motivation for creatating money?

Money is defined as a good that has the properties of divisibility, interchangeability, portability, and durability.[1] It is therefore possible to divide it to smaller units, such as a hundred dolars to dolar and those to cents. When exchanging a product for money, we can easily pay its stated value and not report a loss in hundreds of dolars if the smallest unit would be a thousand dolar banknote. Thanks to interchangeability, we have the option to pay with two hundred-dolar banknotes or one twohundred-dolar banknote when making a purchase, and the counterparty basically doesn't care what form the money will receive if it receives the agreed amount. Portability simply means that I can easily put money in my pocket and pay with it anywhere, anytime later. With a herd of goats, it will be much difficult to pay because they won't let me into the marketplace with te herd. Durability provide long-term trust in money, due to long-term validity and low in wear and tear over time due to frequent use.

In ancient times, when none of the forms of money existed, it was traded on the basis of a barter trade, or on the basis of a debt or a gift. Barter posed a problem of double matching of needs.[2] If a grain grower had a need, such as obtaining arable land, the blacksmith had to have in return the need to obtain grain of adequate value from the grower. If the shoe manufacturer had the same need and the blacksmith did not need the shoes, it would be difficult to agree. For this reason, various durable objects were used in ancient times, which were generally accepted, but which no one needed from a direct practical point of view. These included, for example, decorative shells called kauri.[3]

About 5,000 years ago, so-called commodity money developed in Mesopotamia, representing an existing commodity. For example, one shekel represented 160 grains of barley. It was therefore no longer necessary to move the barley as such, only information on the ownership of the barley stored in the granary was passed on. The first coins, representing commodity money, began to be minted in Lydia between 650 and 600 BC.[4]

The first paper money began to be used in China in the 7th century and was called representative money. These were created as proof of gold or silver deposited at merchants or in banks. People began exchanging these documents. However, they did not crowd out the commodity money used in the form of coins. In Europe, the first paper money was not printed until 1661 in Sweden. Subsequently, so-called gold standard began to emerge in Europe, i.e. paper money exchangeable for a fixed amount of gold. This money eventually became legal tender, which was accepted by most of the world's states at the beginning of the 20th century. After World War II, most of the world's currencies were pegged to the US dollar, which was subsequently pegged to gold. In 1971, however, the United States abandoned this model, and legal tender is now mostly covered only by the convertibility of a given currency into goods through payments.[4]